TransCanada Corp. is extending its plan to increase investor payouts by 8 per cent to 10 per cent annually through 2020 even after the U.S. rejected its $8-billion (U.S.) Keystone XL pipeline.
Dividend growth is supported by $10.8-billion worth of small to medium-sized pipelines and power generation facilities scheduled to start up by 2018, executives said Tuesday at a meeting with investors in Toronto. Payouts could be higher if major projects move ahead. All told, TransCanada expects to undertake projects worth $36.7-billion.
TransCanada is pursuing bite-sized projects as it seeks to win approval for large-scale pipelines held up by environmental opposition and regulatory scrutiny, including the Keystone XL project rejected this month by U.S. President Barack Obama. The company has been cutting employees and contractors to lower costs as its customers slow growth amid an oil slump that has lasted about 17 months.
"We're at the worst combined commodity cycle that I've seen in my career, yet our assets are performing exceedingly well," Chief Executive Officer Russ Girling told investors Tuesday. "With our strong and growing cash flows as well as our industry– leading dividend coverage ratios, we're well positioned to grow that dividend."
In 2014, the Calgary-based company said it planned to at least double the annual growth rate for its dividend to 8 per cent to 10 per cent through 2017. Earlier this year, the quarterly payout rose to 52 cents a share from 48 cents.
Cash flow may be impacted by the commodity slump as some contracts are based on transported volumes that are at risk of falling, John Kim, a Toronto-based fund manager who holds the company's shares at Aston Hill Financial, said in a phone interview Monday.
"What I really look for from TransCanada is how they're going to stabilize their cash flows," Kim said. "With smaller projects, there's a lot less regulatory risk, especially if you're doing expansions to existing lines or twinning existing lines."
TransCanada has sought to convince investors there is more to the company than the Keystone XL pipeline, which has grabbed news headlines for the last five years. Shares are down about 5 per cent since Nov. 5, the day before Obama denied a permit for the project.
Shares rose 0.8 per cent to $42.90 (Canadian) at 11:08 a.m. in Toronto, compared with a 0.8-per-cent decline in the Standard & Poors/ TSX Energy Index. TransCanada, which has eight buy and eight hold recommendations from analysts, has fallen 25 per cent this year.
In the last week, TransCanada won a contract to build a $500-million (U.S.) natural gas pipeline in Mexico and announced a $427.9-million expansion of its Alberta gas network. The Mexican announcement came four days after Obama denied a permit for Keystone XL, one of four major oil and gas conduits the company has been trying to advance.
The plan to build Keystone XL remains part of TransCanada's pitch to investors though the company has yet to say how it plans to proceed.
"They have the cash flow right now to do these smaller projects," Rebecca Hazan, a Toronto-based associate portfolio manager who holds TransCanada shares at Leon Frazer & Associates Inc., said in a Nov. 13 interview. "Then we'll wait to see what happens with these larger ones."
The company sees the potential to make additional acquisitions, Girling said Tuesday, after last month agreeing to buy a so-called merchant power plant in Pennsylvania. The "meltdown" in stocks of U.S. master limited partnerships, or MLPs, could create more opportunities, he said.
TransCanada has contributed to job losses in the nation's oil patch that have exceeded 36,000 since the price slump began, according to an estimate by the Canadian Association of Petroleum Producers. The company intends to complete the latest round of cuts by the end of November, Terry Cunha, a TransCanada spokesman said Monday.